Please excuse my 2 week absence. Lots of happenings going on these days for The Fake Cheap, so not much blogging time. However it appears I’m back on track for the time being so lets get the finance stuff underway.
Something a bit different for this post. As you may of gathered from the title, I will be commenting on a recent episode of CBC’s (Canadian Broadcasting Corporation for all you non Canucks) Marketplace. This a a show that frequently has episodes on customer service related issues where they send out people with hidden cameras to capture what they have found. This episode is about financial advice given at the “big five” Canadian Banks and 5 investments firms. Having spent a few of my working years as a financial advisor for one of these 5 banks, and having and interest in the current financial world, I was very eager to see what this episode had to say about what it found. I do believe the full episode can be seen from somewhere on the Marketplace site, so go there and enjoy if you wish. I have a summary of what was discussed and my response is in italics.
The show starts with the “undercover” customer’s details: 32 year old female, 102K family income, Line of Credit 25K and a 74 K mortgage (that is pretty good a 32 year old). She has 50K that she wants to do something with, via inheritance. Preet Banerjee is introduced as the shows financial expert helping them to asses the scenarios. Preet starts off saying how this is a low interest rate environment and investments aren’t projected “go very quick”, and since our customer sounds conservative, there is merit to her paying down the debt.
Fake Cheap: Generally I recommend to pay off debt first, ESPECIALLY for someone who knows nothing about investing/money/financies. I don’t know if I would use the terminology about investments “going very quick” or not, but the foundation of what Mr Banerjee is saying sounds good to me.
What do the advisors say about paying of the debt? Some got it right. One non bank advisor said this, and I LOVE what this guy said “You are going to be in debt for the rest of your life. Is nothing to be afraid of. It’s just the reality of living in these times. ”
WOW. Just WOW. Talk about your great financial advice. I think that should be a pillar of all financial advice, right there. No doubt this advisor wants you to invest so HE GETS PAID. He aint* getting paid when your paying off debt you already made.**
Some advisors didn’t even mention debt, according to the show. In the clip the show provides, they state the advisor didn’t even mention debt until the undercover customer brought it up.
Here is where my experience in the banking world comes into play. If I had someone walk into my office to talk about investing, to talk about RRSPs, to talk about TFSAs; oddly enough, THAT is what Im going to start talking about. The clip they show the advisor says something about him forgetting to mention debt. To me, this is excusable, to a point. You should also know if you have never worked in a place of peddling financial goods, when you start to talk about other financial things than what the person came into discuss, half of them are going to shut up, and not want you prying into that aspect of their life. And not ever come back to do that initial investment with you. So it is a very fine and difficult line to walk. It is very difficult to have a complete financial picture of someone in an hour, which was the duration of most of my bank appointments.
Preet says the adivsors dont make money when you pay off debt (correct). He adds, when you do invest with them, then money is usually made. This is discussed as a conflict of interest, and most people should be aware of this.
I could not agree more.
Next an affected person is featured. Their story is that they signed up for loans on the advise of a financial advisor, and then invested that money. (This is called leveraged investing.) The investments tanked, and the lenders wanted their money, to the tune of about 150K. Of course, they had no money to pay them back, and bankruptcy had to be declared. So this poor fellow was wiped out. These were put into high risk investments. However, this guy is a risk adverse (he likes safe investments), and this possibility about losing everything was never explained to him.
I feel bad for this guy, but surely there must have been red flags somewhere. Remember, the only guaranteed investment is a GIC, a Guaranteed Investment Certificate. That is why the rates are so low on these things. Also note that GICs are guaranteed up to a certain dollar amount under CDIC (Canadian Deposit Insurance Corporation, google it,) in the event your bank/financial institution should collapse.
The next section talks about risk. What this discussed? At the banks, it appears that it was covered, at one of the investment firms, it is only brought up when the undercover gal mentions it, and it is said to be a “simple story” to be discussed at a later time.
If it is simple, shouldn’t you take a minute to talk about it and get it out of the way?
Preet says that advisors can make more money by putting you in higher risk investments, so they may be tempted to do this.
There is that conflict of interest again.
Promises are the next topic covered. How much do advisors say they can make our agent? One agent is shown discussing “10 to 12%”. It appears he does some calculations to at least try to back this up, he also appears to be talking about 10 to 20 year market segments. I have no idea if this rate of return is true or accurate or not. Again, my banking past tells me that this is probably the latest training given as way to show clients potential returns. Also note that this advisor does throw in the word “potentially”.
This is really all you can do. You can’t guarantee returns. But you do have to show that potential higher returns are possible, otherwise why would anyone take on any risk? Should advisors just say “I have no idea” when asked what kind of return may be expected? Of course not. Note I’m not saying it is ok to make stuff up here and stretch returns so you can get a sale.
They say the next guy takes the cake, and oh boy, does he ever. This guy is throwing out cold, hard, return numbers. “After a year, you should have $10,000 extra AT LEAST. It’s free, almost like a free ride.” Preet said this is ridiculos, and complete BS.
100% agree with Preet on this. If you ever hear anything like this from an advisor you are meeting with, LOSE his number, and warn your friends about him.
Beleive it or not, the next advisor is even worse, another boutique advisor. According to him, our customer will earn “$5,000 within just a few months, couple of months, at least. $10,000 after a year, or $15,000, or maybe $20,000.” Preet laughs at this and says this is one of the worst pieces of advise he has heard in his life. And says this advisor must be incompetent or lying. The show advises to “don’t show your money if adviser promises big returns.”
Sound advise from the show, I fully agree.
What are the charges and fees? They show clips of 2 advisors from the investment frims and they appear to each have some vague explanation of what the fees are. The show provides an example of fees work. Preet says any song and dance about fees should be a red flag. A private firm advisor is again shown, talking about how the fee is a free ride, and fees are only paid on the growth of the investment. Finally a bank advisor is featured, and she also stumbled badly when explaining fees.
The example provided is basic, but it gets the point across. Preet is on the ball again, Im getting to like him. He calls the 2nd advisors explanation of fees an epic fail and utterly misleading. Agreed. Preet is enraged, and thinks this should be basic information. I agree. You would be shocked at the amount of people who don’t ask what this cost, or how they pay for mutual funds. If you want a percentage, I would say over half, maybe even 75% of the people did not ask about fees in my expereince. The fees are disclosed in the documentation provided, which is supposed to be read by the customers. So the advisors are “covered” if they aren’t actually discussed.
I found this to be a very accurate picture of what I suspected to be out there. Anyone have any experience they want to share in dealing with a financial advisor, good or bad?
*I just made this up. Pretty sweet, eh? Remember this when meeting with a financial advisor.
**I don’t normally use ain’t, but when I do it is mostly used for comedic purposes.
Edit March 11 2013 –
If you liked my post or the Marketplace episode you MUST have a look at this follow up article I found on Spring (the Blog) there is a great write up which includes video with Preet Banerjee and other finance bloggers. Be sure to check out the rest of the blog too, it might just be my new favorite finance blog! Enjoy!